Nature of Risks

• Reduction and Control of Risks
• Know Your Client Scheme
• Database of lost , Stolen , Misplaced Securities
• Client Caution Database
• Verification of shares at members office
• Inspection

Integrated Comprehensive Insurance Policy for Members
Property Insurance Policies


Nature of Risks:

The Exchange has been exposed to a large number of risks, which have been inherently borne by the member brokers for all times. Since the introduction of the screen based trading the nature of risks to which the members of the Exchange are exposed to has undergone radical transformation. At the same time the inherent risk involved with the trading of paper based securities still remains. Though the process of dematerialisation has already begun, till such that it is made compulsory in all Securities, the risk of trading in fake/forged shares and instances of loss of shares etc. will continue to exist. The safe custody of these shares in physical form in the Exchange as well as in the member brokers offices is of prime importance.

The Risks can be classified as under:

1 . Risks associated with Paper Based Trading

• Lost/misplaced securities
• damage to securities
• loss of securities in transit

2. Client Risk

• Client default
• Client absconding
• Fake/ forged/stolen securities introduced by the clients

Reduction and Control of Risks:

As a measure of the pro-active risk control several measures have been initiated by the Exchange to reduce the risks to which the Exchange and the member brokers are exposed. In this regard the Exchange has initiated the following measures:


1.Know Your Client Scheme :

Under the procedure the member brokers of the Exchange are compulsory required to obtain detailed information of clients prior to commencement of any transactions for new clients. A similar procedure is also to be followed for existing clients. This information is to be made available to the Exchange authorities whenever called for. In case the member brokers fails to furnish the same it is viewed seriously.


2. Database of lost , Stolen , Misplaced Securities :

The Exchange maintains a database on all the shares that have been reported as lost, stolen, duplicate etc. by the Companies / registrars. The information available through the database is time relevant thus the database is modified on a regular basis and is downloaded by the members through BOLT on a weekly basis. This database is also provided to the Clearing House. The member brokers can thus reduce the instances of delivery of shares that have been reported by the Company as bad delivery by checking all the deliveries in their office with the database provided. The Exchange has designed and developed a software module for the above for the benefit of the members.

The Clearing House also uses the database. At the time of pay-in the members of the Exchange are required to submit the details of the shares being deposited in the pay-in in a softcopy in a prescribed format.. These details are checked against the database and a report is generated in case a match is found. Such shares are then reported as bad delivery in the Exchange. Further follow-up is done with the delivering broker and they are directed to lodge a police complaint against the client introducing the stolen shares.


3. Client Caution Database :

The Risk Management department in conjunction with the Bad Delivery Cell of the Exchange, the Exchange has designed and developed a client database. All member brokers whose clients / sub-brokers have introduced fake / forged shares are required to lodge a FIR / Police complaint against their clients and also report the same to the Exchange. The information of such clients is called for in a prescribed format. As per the scheme the members have to collect detailed information about the clients. These details are incorporated in the database, which is downloaded to the members, as a precautionary measure. The member brokers at the time of admitting new clients can refer to the client caution database for further verification.


4. Verification of shares at members office :

The Risk Management Committee has outlined a process for minimising the risks arising out of Fake/ forged /stolen shares introduced by the clients of the member brokers.

As per the procedure outlined issued by the Exchange, in case the transaction in a Security with one particular client in a settlement exceeds Rs. 10 lakhs then the member brokers are required to send the photocopies of the transfer - deeds and the share certificates to the Company / Registrar for verification of the material particulars. The members can select a random sample for the same from the lot. A similar procedure should also be followed in case the shares worth more than Rs. 10 lakhs are received from the Clearing House during pay-out in one Security.

The basic idea behind the introduction of this procedure is to prevent Fake/ forged/stolen shares from being introduced in the market. The Exchange issued a notice outlining the procedure to be followed. The above procedure is an important Risk Management Tool especially where there exists a large volume of deliveries. The Risk Management Department acts as a facilitator in this regard and has written to all "A" group and B1 group companies in this regard seeking their co-operation.


5. Inspection :

The department is carrying out inspection of the member brokers records as regards compliance of the risk management procedures.


Integrated Comprehensive Insurance Policy for Members

To reduce the systematic risk, Securities & Exchange Board of India ( SEBI) vide its circular ref. No SMD/SED/RCG/270/96 dated January 19th, 1996, had directed all stock exchanges to ensure that all active Members are properly insured. Insurance companies in consultation with BSE have offered an insurance policy which covers losses on account of trading as well as back office losses to the Members. The minimum sum insured is Rs.5 lakhs per Member

Presently, all active Members obtain the said policy directly from the insurance companies and then inform BSE about the same.

Property Insurance Policies

The assets at BSE are fully covered through fire, burglary theft ( including terrorism) insurance policies.